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Bear of the Day: PulteGroup (PHM)

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PulteGroup, Inc. (PHM - Free Report) is facing a challenging housing market in 2023. This Zacks Rank #5 (Strong Sell) is expected to see a big earnings decline next year as housing slows further.

PulteGroup is the nation's third largest homebuilder. It operates in 24 states and in over 40 major markets. It's brands include Centex, Pulte, Del Webb, DiVosta, John Wieland Homes and Neighborhoods, and American West.

It's sales consist of 32% first-time buyers, 43% to move up and 25% active adult. It's Del Webb and DiVosta brands are there to serve the baby boomers as they head towards retirement.

An Earnings Miss in the Third Quarter

On Oct 25, 2022, PulteGroup reported its third quart results and posted a rare earnings miss. Earnings were $2.69 compared to the Zacks Consensus of $2.73, or a $0.04 miss.

This was only the second earnings miss in the last 5 years, with the other one in 2021.

Revenue was up 16% to $3.8 billion, driven by a 15% increase in the average sales price of homes closed to $545,000, along with a 1% increase in closings to 7,047 homes.

Gross margins also rose by 360 basis points year-over-year to 30.1% from 26.5%.

Unit backlog totaled 17,053 homes, down 14% from a year ago. The backlog value rose 3% to $10.6 billion.

Given the changing market conditions due to rising mortgage rates, PulteGroup elected to terminate a number of pending land transactions and wrote off $24 million of deposits and preacquisition expenses associated with the deals.

Analysts Cutting Earnings Estimates for 2022 and 2023

PulteGroup's headline report looks solid because they are still delivering out of their big backlog from before rates rose.

But analysts have been cutting estimates over the last 30 days.

In the last month, 6 estimates were lowered for 2022 which pushed down the Zacks Consensus Estimate to $10.15 from $11.21 90 days ago.

That is still earnings growth of 39% compared to 2021, when PulteGroup made $7.30.

4 estimates were also cut for 2023, but one was raised, in the last month as well. The 2023 Zacks Consensus Estimate has plunged to $7.09 from $9.98 in the last 90 days. That's down 30% from 2022's hot market.

Value or Value Trap?

PulteGroup shares are down 20.3% year-to-date which is worse than the S&P 500, which has fallen 15.8%. But with mortgage rates jumping over 7%, it's not surprising that investors have jumped out of the homebuilder stocks this year.

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Shares are dirt cheap. PulteGroup has a forward P/E of just 4.3. But with those earnings expected to decline sharply next year, that makes it a value trap.

PulteGroup does pay a dividend, which currently yields 1.4%. It also has a share repurchase program. In the third quarter, it repurchased 4.4 million shares, or 2% of its common shares, for $180 million.

With mortgage rates remaining elevated, and a possible recession looming, it may be too early to dive back into the homebuilders. Watch the earnings estimates for a turnaround.

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